NMI Holdings, Inc. — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017; comparisons are with the corresponding 2016 periods unless noted. NMI provides private mortgage insurance through its insurance subsidiaries and limited outsourced loan-review services. The interim results are not necessarily indicative of full-year results.
Financial and operating performance
| Metric | Q2 2017 | First half 2017 |
|---|---|---|
| Total revenue | $42.2 million, versus $29.5 million | $79.3 million, versus $51.7 million |
| Net premiums earned | $37.9 million, up 46% | $71.1 million, up 55% |
| Net income (loss) | $6.0 million; diluted EPS $0.10 | $11.5 million; diluted EPS $0.18 |
| Claims and claim expenses | $1.4 million | $2.0 million |
| Underwriting and operating expenses | $28.0 million | $54.0 million |
| Loss / expense / combined ratios | 3.6% / 74.0% / 77.6% | 2.8% / 76.0% / 78.8% |
| Operating cash flow | $14.6 million for the first half, versus $27.6 million |
First-half 2016 net loss was $1.9 million. Net investment income was $3.9 million in Q2 and $7.7 million in the first half, compared with $3.3 million and $6.6 million, respectively. Q2 income tax expense was $3.5 million; first-half tax expense was $4.7 million. The reported effective tax rates were 36.7% for Q2 and 29.1% for the first half.
At June 30, 2017, total assets were $863.0 million, including $673.7 million of investments and $20.0 million of cash and cash equivalents. Shareholders’ equity was $495.0 million. The term loan had a $147.4 million principal balance ($144.0 million carrying amount); its stated all-in interest rate was 7.87% at quarter-end. The company reported compliance with its debt covenants.
Material changes and business developments
- Primary insurance in force grew to $38.6 billion from $23.6 billion a year earlier; total insurance in force was $42.1 billion. Primary risk in force was $9.4 billion.
- Q2 primary new insurance written was $5.0 billion, down 14%; first-half production was $8.6 billion, down 15%. Management attributed the declines mainly to deliberately reducing single-premium production; monthly-premium production grew 11% in Q2 and 13% in the first half. Monthly policies represented 81% of first-half new insurance written.
- Net premiums written declined 19% in Q2 and 14% in the first half, reflecting lower single-premium production and reinsurance cessions. Earned premiums rose as the insured portfolio grew.
- Underwriting and operating expenses increased 21% in Q2 and 18% in the first half. The company cited higher staffing and $4.8 million of first-half expenses related to the 2017 insurance-linked notes transaction and term-loan amendment.
- In May, the company entered into excess-of-loss reinsurance through Oaktown Re, with $211.3 million of coverage at inception for specified 2013–2016 business; coverage outstanding was $197.2 million at June 30. The company retains the first $126.8 million of aggregate losses and losses above the available coverage. The 2016 quota-share arrangement also remained in effect.
- The February 2017 loan amendment extended maturity to November 2019 and reduced the interest rate. First-half interest expense fell to $6.8 million from $7.3 million.
- A prior-period correction reduced 2016 net income by $1.8 million, from $65.8 million to $64.0 million, due to an overstated deferred tax asset and income tax benefit. Management described the correction as immaterial.
Outlook, risks and unusual items
- No specific financial guidance for full-year 2017 is provided. Management expects near-term claims to remain relatively low, but expects claims to rise as more of the portfolio reaches the historically higher-claim years, generally years three through six after origination. It estimates a 20%–25% lifetime loss ratio on the existing portfolio and expected claim severity of 85%–95% of coverage; actual outcomes depend on loan characteristics and economic conditions.
- At June 30, NMIC reported PMIERs available assets of $485.0 million against $298.1 million of risk-based required assets. The company said the increase in available assets and reinsurance-supported reduction in required assets contributed to the position. Statutory capital, regulatory approvals and continued eligibility under GSE requirements remain important constraints.
- Management identified risks including changes in GSE or FHA practices, competition, housing and financial-market conditions, interest rates, reinsurance counterparty performance, claims exceeding estimates, and the ability to maintain required capital and regulatory approvals. The investment portfolio is exposed to interest-rate and credit risks; a parallel 100-basis-point rate shift was estimated to change portfolio fair value by 3.92%, including cash and cash equivalents.
- Disclosure controls were deemed ineffective at quarter-end because of a material weakness involving reconciliation support for deferred-tax balances. The company said it had enhanced and implemented controls intended to remediate the weakness, but gave no assurance remediation would be sufficient.
- The company reported no material off-balance-sheet arrangements and no material legal accrual; it cautioned that litigation and regulatory outcomes remain uncertain. NMIC could not pay dividends to the parent through December 31, 2017 without Wisconsin regulator approval.
Key facts for investors to verify
- Whether the deferred-tax control weakness has been fully remediated and whether subsequent filings report further errors.
- How defaults, paid claims, reserve development and claim severity evolve as the relatively young insured portfolio seasons.
- Whether PMIERs capital headroom and state statutory capital remain adequate as insurance in force grows, and whether reinsurance receives continued GSE and regulatory credit.
- The cost, coverage, counterparty protections and termination conditions of the Oaktown Re and quota-share arrangements.
- Cash generation and liquidity at both the holding company and insurance subsidiaries, including covenant compliance and the ability to meet term-loan obligations.
- Whether the prior-period tax correction or effective-tax-rate assumptions require further adjustment.